Microsoft depressed by search results

Microsoft is continuing to lose market share in the search business to industry rival Google, something the software behemoth's financial chief said he is "not happy" about.

And things aren't expected to turn around any time soon. Microsoft said its internet services business will produce less sales growth over the next two quarters than the company had previously forecast.

Where it once forecast that revenue might grow by as much as 11 per cent, the company now sees full-year sales growth in its web services business of just three per cent to eight per cent.

Technology Business Research analyst Allan Krans said in an email interview: "Success continues to elude Microsoft in this market." Krans said Redmond is hardly alone, with other rivals also struggling to keep pace with Google.

He said: "Given Google's large head-start in the market and its ongoing momentum, we think it will be very difficult for Microsoft to have a real impact in the online search market during 2007. However, Microsoft continues to take a long-term approach to this market, and plans to keep the investment dollars flowing into its ad business."

Microsoft has been investing heavily to try and grow its ad-backed businesses, aiming to build a second Windows Live brand to sit alongside its MSN business. In recent years, the company has shifted to its own technology for both the underlying search engine and for paid search.

The shift from Yahoo!'s Overture engine to Microsoft's own AdCenter paid search system has had a particularly strong impact, with Microsoft taking a hit in the amount of revenue it derives from each search query. The company is also losing ground in terms of overall share of the search market.

A report on December internet traffic from ComScore Networks showed Microsoft losing half a percentage point of market share in US web queries, down to 10.5 per cent. Google and Yahoo! both posted gains, to 47.3 per cent and 28.5 per cent, respectively.

In response to an analyst's question on the company's profits conference call, Microsoft CFO Chris Liddell said: "On the search side you are correct we lost market share." He said he is "clearly not happy with that".

Liddell said Microsoft continues to "take a long-term view of this business" and is making progress in some areas. The company also hopes this year to turn the tide in its revenue per search query. "We still expect to get revenue per search equal to where we were a year ago by the end of this year," he said.

Other parts of Microsoft's advertising business are doing better, he said, pointing to the display advertising business. "Clearly there is a better story on the display side," he said. "We are growing broadly in line with the market... We're comfortable with the progress we're making there."

Redmond is investing billions in its advertising business but its forecast shows it meeting overall financial goals only because of better than expected strength in its core Office and Windows franchises.

Microsoft appears committed to growing the business organically, Krans said, adding he doesn't believe the company will buy Yahoo!, a prospect that has been the subject of on-again, off-again rumours.

He said: "Although the company does acquire, most of Microsoft's purchases are smaller-scale, tuck-in acquisitions that fill gaps in current product offerings. Yahoo!'s current market cap is $38.37bn, which would be a large purchase even for Microsoft."

Ina Fried writes for CNET News.com